Apply economic cost concepts in making business decision

The distinction primarily shows how cost affects the cash position. Suppose a person is offered a choice to make between a gift of Rs.

This is used when multiple people are involved in making a decision. We have to take help of several estimates concerning mutual relationship of economic elements for correct forecasting. Thus, whether a specific cost is direct or indirect depends upon the costing unit under consideration.

Explicit and Implicit or Imputed Costs: The company is not paying any rent for the building from where it is operating as the building is owned by the promoter of the company. While marginal cost refers to the cost of the marginal unit of output, incremental cost refers to the total additional cost associated with the marginal batch of output.

The latter are like chopping off the additional fat and are not directly associated with a special curtailment decision. Accountants and economists both include explicit costs in their calculations. For a small start-up that intends to enter a business category already dominated by large, established players, the challenges can be overwhelming.

Large firms can buy from wholesalers at volume discount prices. Blockbuster, Circuit City and Sears, to name a few. Money that has already been spent is not a factor in the decision.

Some Analytical Cost Concepts: Money Cost plus the rent which the building belonging to the promoter could have earned in outside market Accounting Cost and Economic Cost Accounting Cost includes all such business expenses that are recorded in the book of accounts of a business firm as acceptable business expenses.

If the price of Firm A's shirts is reduced to less than what Firm B's shirts are selling for, then theoretically, Firm A's shirts would outsell the competition.

If it is expected that option of opening the company owned and operated service stations will generate an additional profit post charging various expenses of Rs.

A microeconomic theory called perfect competition refers to small businesses and start-ups where many small companies supply a single product or service.

It is obtained by dividing the total cost TC by the total output Qi. Therefore, the opportunity cost may be defined as the expected returns from the second best use of the resources foregone due to the scarcity of resources. SWOT stands for strengths, weaknesses, opportunities and threats, which is exactly what this planning tool assesses.

Subodh has two job opportunities in hand. Opportunity Cost Principle By the opportunity cost of a decision is meant the sacrifice of alternatives required by that decision.

The replacement cost figures in the business decision regarding the renovation of the firm.

Future costs are those costs that are likely to be incurred in future periods. Implicit costs may be defined as the earning expected from the second best alternative use of resources.

Variable Cost on the Other hand is directly proportional to the production operations. This can also be understood by a simple example - Let us assume that an individual has two job offers in hand.

The opportunity cost of holding Rs. Various allowed business expenses. More often than not, senior managers make the right decisions.

Consumers may inexplicably tire of blue shirts and prefer another color. If this building had been rented out by the promoter in the market then it could have earned a rent of Rs.

But, do you really need all of this information when making decisions? An Example Let's take a closer look at this shirt manufacturing firm. Working on a Budget Even the wealthiest individuals and organizations have a limited amount of capital resources to work with.

And the difficult problem is estimating these indirect effects rather than directly savable costs. The relevant costs are also referred to as the incremental costs. Explicit costs refer to those which fall under actual or business costs entered in the books of accounts.

The opportunity cost arises because of the foregone opportunities.information and apply them in decision-making situations. 7. We call the $15, an opportunity cost of making the decision to attend college. Economic decision making, in this book, refers to the process of making business deci-sions involving money.

All economic decisions of any consequence require the use. The microeconomic concepts that drive the decision-making processes of an established firm also apply to start-up businesses. A major difference, however, is that the small start-up typically won.

Cost-benefit analysis: This technique is used when weighing the financial ramifications of each possible alternative as a way to come to a final decision that makes the most sense from an economic. It is concerned with the application of economic concepts and analytical tools to the process of decision-making of a business enterprise.

Thus, managerial economics or business economics is a ‘special branch of economics that bridges the gap between abstract economic theory and.

Costs and Decision Making Chapter 5 Cost Behavior and Relevant Costs This chapter introduces concepts and tools that will be used in Chapters 6 through 8. Chapter 5 vant costs and apply the concept to decision making Illustrate the impact of income taxes on costs and decision making 2 3 4.

Managerial economics deals with the application of the economic concepts, theories, tools, and methodologies to solve practical problems in a business.

It helps the manager in decision making and acts as a link between practice and theory". [1].